Sara Lee Spinoff Sees Bean Coffee Machine Toppling Kraft

After years of development, Sara Lee Corp. mothballed a machine that makes cups of coffee from freshly ground beans. Now, managers of Sara Lee spinoff D.E Master Blenders 1753 NV are counting on the machine to help turn the company around and unseat Kraft Foods Inc. (KFT) as the world’s No.2 coffee maker.

“I have seriously great hopes about it,” Master Blenders Chief Executive Officer Michiel Herkemij said in an interview. Orders from retailers for the system, called Sarista, have been double the Amsterdam-based company’s expectations, according to the CEO. The machines go on sale in the Netherlands next month.

Master Blenders’s market share is less than half that of Kraft and a quarter of Nestle SA (NESN), whose Nespresso is the biggest single-serve brand in the $45 billion global coffee business. The CEO says product innovation, missing under Sara Lee’s stewardship, will help close the gap on those rivals.

Sarista makes cups and pots of coffee from roasted beans vacuum-sealed in interchangeable canisters that the company calls bean-funnels. That’s different from most single-serve systems, which use pre-packaged pods or capsules of ground coffee in their own filter.

The name is a mashup of “barista” and Master Blenders’s Senseo brand of single-serve coffee machines. Sarista uses patented technology co-developed by Royal Philips Electronics NV (PHIA) to make either single cups or a pot of freshly-brewed coffee in six blends. It will initially sell for 249 euros ($320) and cost coffee lovers about 24 euro cents per cup, versus about 35 euro cents for a cup of Nespresso.

Photographer: Daniel Acker/Bloomberg News.

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Photographer: Daniel Acker/Bloomberg News.

Bean Fetish

To succeed, Herkemij needs Europeans to develop the same fresh-bean fetish that Starbucks Corp. (SBUX) has cultivated among Americans. Sarista enables Master Blenders to combine its strength in roast and ground coffee -- which Liberum Capital says accounts for about half its 2.8 billion euros in sales -- with single-serve, the fastest-growing part of the business. About one-fifth of Master Blenders’ sales come from single-serve coffee, Liberum estimates.

The $4.3 billion market for single-serve coffee is growing about 30 percent annually, according to data tracker Euromonitor International. Expansion in the full-bean market trails at about 11 percent a year, yet that segment still outpaces the overall coffee market’s 7 percent.

“Grinding your own coffee, there’s something there that’s powerful and has great potential,” said Herkemij, a former Heineken NV executive who was hired by chairman and fellow Dutchman Jan Bennink a year ago. He hasn’t set a date for boosting Master Blenders’ 5.9 percent share of the global coffee market beyond Kraft’s 13 percent. Nestle is leader with 23 percent, Euromonitor reports.

‘A Distraction’

Beans have fueled U.S. coffee sales, thanks largely to efforts by Starbucks, “but this has not yet happened in Western Europe,” a region that accounts for about two-thirds of Master Blenders’ sales, said Pablo Zuanic, an analyst at Liberum Capital in New York.

Indeed, Sarista could become “a distraction,” Zuanic said in a Sept. 7 note, adding that the Senseo brand will be “a lot more important” in the next two years.

While Sarista is a good idea and makes quality coffee, Master Blenders needs much more than a new machine to meet its ambitious growth targets, said Jonny Forsyth, a beverage analyst at Mintel in London.

“I’d say there’s a less than 50 percent chance” of Master Blenders overtaking Kraft, Forsyth said. “The market share differential is massive. I’m a little bit skeptical.”

Appliance Overload

Nestle tops the single-serve market in western Europe with a 38 percent share, according to Euromonitor, followed by Master Blenders with 22 percent and Kraft at 8.4 percent. Competition in single-serve is heating up, with Starbucks and Green Mountain Coffee Roasters Inc. (GMCR) of the U.S., and Tchibo GmbH of Germany all introducing new machines this year.

“The retail price is very high” for Sarista, said Lorenza Della Santa, a consumer appliance analyst at Euromonitor in London. “It’s not impossible but it will be challenging for this type of hybrid coffee machine to gain share.”

Herkemij acknowledges that a key challenge will be to persuade coffee-lovers to embrace a new system, though he believes sampling in supermarkets will be key to winning over shoppers. The machine will be sold by electronics retailers and department stores, and marketing will be expanded over time to sell the system to small businesses for use in company canteens and conference rooms. More roll-outs of Sarista are planned in other countries, Herkemij said, without giving details.

’Game Changer’

The availability of Sarista containers in supermarkets could give it an edge over Nespresso, which must be bought online or in dedicated boutiques. Kepler Capital Markets estimates that Master Blenders may generate 30 million euros to 40 million euros in revenue from Sarista containers over the current financial year.

“Sarista could be a game changer in the European coffee space,” said Jon Cox, a consumer industries analyst at Kepler in Zurich. “You’ll get the cleanliness and functionality of a Nespresso and the quality standard that you’d get in a café, so it will be a challenge to other systems.”

Sarista sales will boost Master Blenders’s profitability, said Herkemij, who aims to eventually get operating margins into the 15-17 percent range, versus last year’s level of 12.3 percent.

Bumpy Road

Jamie Isenwater, a Deutsche Bank AG analyst in London, said he expects Sarista to be a “major contributor” to Master Blenders’ profit growth, and estimates margins will widen to 15.9 percent by 2015.

The company’s early days as a standalone entity have been rough. In August, its shares plummeted after the coffee maker said it would restate earnings because of accounting irregularities in Brazil. And its fourth-quarter results were “disappointing,” according to analysts at both Deutsche Bank and Nomura, with profit forecasts for 2013 falling below some analysts’ estimates. The shares have fallen 2.8 percent since official trading began in Amsterdam July 9, compared with an 8.9 percent rise in the Stoxx Europe 600 index.

One thing Herkemij says he won’t do is try to goose sales by hiring a celebrity spokesman for its advertising, as Nespresso has done with actor George Clooney.

“Clooney’s getting old,” he said. “I believe more in real people. We’re going back to the roots -- back to coffee.”

To contact the reporters on this story: Dermot Doherty in Geneva at ddoherty9@bloomberg.net; Matthew Boyle in London at mboyle20@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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